Question

Powell Company acquires 80% of Short Company for $500,000 on January 1, 2019. Short reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired.Short earns income and pays dividends as follows:

	2019	2020
Net Income	$100,000	$120,000
Dividends	$40,000	$50,000

Assume the equity method is applied.

1. Prepare a fair value allocation schedule for Powell’s acquision of Short company including goodwill.

2. How often do you prepare fair value allocation? (MC question - circle the correct answer)

1. As the fair value of acquired assets changes, a new fair value schedule is needed every year.
2. Only once at the time of acquisition (1/1/2019).
3. Only once at the closing date in acquisition year (12/31/2019).

3. Compute Powell's income from Short for the year ended December 31, 2019. (i.e., what is income from equity investment that will be reported on Powell’s book before consolidation)

4. Compute Powell's Investment in Short account balance at December 31, 2019.

5. Compute net income attributable to Noncontrolling interest at December 31, 2019.

6. Compute the noncontrolling interest in Short at December 31, 2019 (i.e. equity balance of NCI).

Answer 1

1. As the fair value of acquired assets changes, a new fair value schedule is needed every year.

Impairment test need to be done for Goodwill at least once in a year

2	Reported Net income	100000
	80% of the net income for 2019 to be shown in Powell books	$80,000	(100000*80%)
3	Initital investment	500,000
	Add: 80% of net income for 2019	80,000
	Less:- 80% of dividend declared for 2019	-32,000	(40000*.80)
	Balance of Investment A/C in Powell books 31/12/2019	$548,000
4	Net income reported	100,000
	Less Additional depreciation of increase in fair value	7,000	(70000/10)
	Corrected Net income	93,000
	20% Attributed to NCI	$18,600	(93000*20%)
5	NCI valuation at acquisittion (see Note)	116000
	Add:- NCI portion of Net incom	18600
	Less: 20% of Dividend declared	-8000	(-40000*20%)
	NCI balance as per 31/12/2019	$126,600

Note:-

NCI Valuation at Acquisition:-

Share capitl	300,000
Rettained Earning	210,000
	510,000
Add:-–Increase in valuation of asssets	70,000
Total net assets	580,000
80% of net assets (A)	464,000
NCI valuation on acquisition	116000